Business Spending to the Rescue?
By Amy Tsao
War anxieties have receded, and the spring weather that was seen as lifting retail sales has arrived, but consumers are pulling back. That wasn't the way it was supposed to work. The forecast was that an end to hostilities in Iraq would dramatically boost consumer spending. Perhaps it's understandable that the surge hasn't happened, since consumers must be feeling tired after exceeding expectations over the past several years, when they kept the economy afloat despite job losses, stock market scandals, and terrorist attacks.
Not everyone is alarmed by the recent pause in consumer spending. "To the extent we didn't see a huge trough [before the war started], why should we see a huge rebound [after it ended]?" asks Eric Jemetz, consumer analyst at New York City-based New Amsterdam Partners. Still, a consumer retreat has revived worries about the outlook for a sluggish economy.
Thankfully, the pressure on consumers to continue the heavy lifting may ease if businesses finally loosen their purse strings. Though the onset of war resulted in a 4.4% drop in business-equipment spending in the first quarter, according to David Wyss, chief economist at Standard & Poor's, he sees that as a temporary retreat from a rebound that began late in 2002.
URGE TO SPLURGE.
He may be right. In March, orders for nondefense capital goods, excluding aircraft, jumped 3.1%, which Wyss calls "very healthy." Many other economists also are hopeful that increased business investment will spur growth in the second half. "It's encouraging," says Wyss of the March figures, "but we need to see this happening for a couple months."
Without the freewheeling consumer, the economy will need all the help it can get. It's not as though Americans don't want to spend -- the latest consumer-confidence surveys suggest that their urge to part with cash is undiminished. True, confidence in March plummeted as the war started, but retail sales (excluding cars) rose 1.5%. Consumer confidence rebounded in April, as it became clear that a military victory was assured in Iraq, but U.S. retail sales dipped 0.9% -- despite the late Easter.
"Consumers are spending all the money they've got," says Wyss. But rising unemployment and sluggish growth in wages are taking their toll. So are the stalled financial markets. What should help are declining interest rates, which are fueling another round of mortgage refinancings and putting cash into the pockets of workers who haven't been getting big raises.
For now, though, retailers are signaling that the summer months aren't looking too bright. Wal-Mart (WMT ), the world's largest retailer and a proxy for the consumer's financial health, has been ratcheting down expectations all year. Early reports for the month of May have been tepid, and so have forecasts.
Target (TGT ) reported better-than-expected same-store sales in April, but sales in May will be flat to 2% higher, it says. "Second-quarter comparisons for same-store sales continue to be challenging," says Emme Kozloff, retail analyst at Bernstein Research. "We still have a few more bumpy months."
Even spending by resilient teens is faltering. "They're somewhat more value-conscious," Tunick says. He points out that April's same-store sales at lower-priced apparel retailer Aeropostale (ARO ) held up better than those at higher-end teen clothier Abercrombie & Fitch (ANF ), where the figures fell significantly below consensus expectations.
Needed most of all to help consumers' willingness and ability to spend is a better employment outlook. Wal-Mart CEO Lee Scott recently noted that he sees job growth, above all else, as the key to higher levels of retail spending. After the Gulf War of January, 1991, consumer spending started to rise only when job growth revived a year later, notes Dave Malmgren, portfolio manager of Rydex Funds in Rockville, Md.
Unfortunately, help on the job front isn't coming any time soon, which is why it's so crucial that businesses pick up the spending pace. The unemployment rate -- which hit 6% in December, 2002, and again in April -- is the highest it has been in almost nine years. And it'll likely worsen through the summer, figures Wyss.
Those who do have jobs aren't seeing a rise in their spending power, either. Real wage growth, which Kozloff calls "the best driver of retail sales," is growing at a very modest rate.
Some hopeful signs point to another consumer binge toward the end of the year. The White House continues to trumpet the effect its proposed tax cut could have on household spending. And Michael Green, a vice-president at Cap Gemini Ernst & Young and head of the consultancy's U.S. retail division, says the war's end lifted the spirits of the very rich.
This is a leading indicator of spending, he adds, noting that same-store sales at high-end department store Nieman Marcus (NMGa ) rose 3.2% in April, while analysts had been expecting a decline. Notes Green: "Wealthy people at the beginning of any type of recession pull back, but they come out and start spending in a normal pattern earlier."
The rich can't do it alone though. The trick now is for businesses to let loose on spending they had postponed until the outcome in Iraq was clear. If that happens, the economy could break out of its holding pattern and gain some momentum in the second half of 2003.
Tsao covers financial markets for BusinessWeek Online in New York
Edited by Beth Belton